Construction like to cool in 2008

New-home construction in Canada is set to cool slightly next year, and would likely drop more precipitously if not for the widespread adoption of longer-term mortgage products, according to one economist.

Housing starts are expected to pull back about 6 per cent in 2008 as rising prices curb demand, according to an outlook by the Canada Mortgage and Housing Corp.

“The pull-back in housing starts next year will be mainly due to increases in house prices in recent years, which have pushed mortgage carrying costs higher,” said Bob Dugan, chief economist at CMHC, in a statement.

This would still put new home construction at a relatively strong 214,000 new units in 2008, the seventh consecutive year in which they'll top the 200,000 mark, according to the report.

Lofty prices in the country's hottest markets, particularly Western Canada, would likely take a much bigger bite out of new construction if it weren't for longer-term mortgage products, said Derek Holt, assistant chief economist at Royal Bank of Canada.

Last year, the federal government extended the maximum amortization period for mortgages from 25 years to up to 40 years. Consumers have embraced these products, which raise the cost of a mortgage over time but lower the entry hurdle to buying a home through smaller monthly payments.

“It's my belief we would be 10 to 20 per cent below 200,000 housing starts next year if it wasn't for the impact of these mortgage innovations,” Mr. Holt said.

Sixty per cent of new terms for insured mortgages are now longer than 25 years, and half of those are 40 year amortization periods, Mr. Holt said.

Housing starts are expected to decline most sharply in Alberta next year due to a an expected drop in net migration to the province, the CMHC said. This will be the result of both the difference in home prices between Alberta and other parts of the country, along with improved economic conditions in other provinces, CMHC said.

Housing starts are expected to rise slightly in just two provinces, Nova Scotia and Ontario, in 2008 compared with the year before.

Sales of existing homes are poised for their best year on record with just over 521,000 units expected to be sold in 2007, as measured by sales on the Multiple Listing Service. The 7.8 per cent increase over 2006 is being led by booming sales in the Prairie provinces.

However purchases of resale homes are expected to slow somewhat in 2008 to just over 500,000 units, a drop of about 3.9 per cent.

A cool-down is already showing in the Edmonton market, where new listings have started to dramatically outpace sales. For the first nine months of the year, the average home price in Alberta's capital city rose 40 per cent to $339,382 compared with the same period last year, according to the Canadian Real Estate Association.

The cost of buying a resale home is expected to stay high across Canada for the rest of the year, rising about 10.1 per cent over last year due to pricing pressure in the Western provinces.

In the first nine months of the year the average price of a Canadian resale home rose 11.9 from the year before to $329,113.

(prepared by Lori McLeod/Globe & Mail